Small companies

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Published: 2021-11-12
Updated: 2023-02-24


A small company can be large. Calculation before and after the new issue of shares may be wise. What events can trigger price development and what triggers exist in the future?

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Small companies according to the small companies funds

Several Swedish small companies funds believe that market capitalization up to one percent of the stock market's total market value in Sweden is counted as small companies. The value of the Stockholm Stock Exchange was SEK 10,000 billion in April 2021 and one percent was SEK 100 billion. The Stockholm Stock Exchange's Large Cap list had 42 of a total of 143 companies with a market capitalization of more than SEK 100 billion in November 2021. Of the more than 950 Swedish companies with price data in the Hitta kursvinnare program, approximately 900 companies are small companies in November 2021.

The stock market is a device for transferring money from the impatient to the patient

A quote from well-known investor Warren Buffet is that “The stock market is a device for transferring money from the impatient to the patient” and it is suitable for many early investments in small companies. The price can go down during low turnover without anything really changing for the company. Low turnover means that few trade in the share and it can be small amounts that drive the price slowly up or down.

When news about the company arrives that makes more people want to trade in the share, the price can change quickly. If this is good news, the price can go up quickly. Those who already own the share sit quietly and still. Those who had the share on their watch list without buying become afraid of missing out on big gains and buys in. Others who monitor changes in price, trading volume or number of owners start trading after a while and then the price soon rises. Some of those who discover the stock when it pulls up will remain as long-term owners even if the price reverses and this can lead to a higher stable minimum level for the price. Slow spread to more people who discover the company and buy shares creates a stable and calm development for shareholders.


Difference between small companies and large companies

According to small company funds, small companies are the most companies we can trade with on the Swedish stock exchange. One of the differences from what can be called large companies is that small companies are rarely monitored by large analysis houses. Large companies are monitored and regularly receive a target price and a recommendation to buy or sell shares from large players such as banks or stockbrokers. Small companies often have few or no target prices and there are few analysts who give a buy recommendation or a sell recommendation.

The company's development phases

A company goes from being a company of hope to establishing itself in the market and then entering a growth phase. Those who invest early in the company's development do not know how it will go for the company and then they take a greater risk. Those who invest late in the company's development take less risk because the company is established. Investing early means a greater risk of a reduced share price and at the same time a greater chance of a large increase in the share price in the long run.

Financing of the company's operations

Non-profit companies need extra money to finance their business. It can be redeemed with various forms of loans or through a new issue of shares. The company's share price multiplied by the number of shares gives the company's total value.

Loans must be repaid later

If the company borrows for its business, the loan must be repaid and it costs money in interest. Future profits are limited by the debts the company has and slow down the company's profitability.

New issue of shares

In the case of a new share issue, new shares are issued which the company sells and then they receive money to be able to continue operations. For the company, a new share issue is an economically advantageous way of raising money compared to borrowing money. If the company's early phases are financed with new issues, the company will be less indebted when the establishment and growth phases are reached. As a shareholder, you need to think about whether participation in a new share issue is beneficial.

More about new issues of shares

New issue of shares can be done in several ways. Those who already own shares usually receive subscription rights in the new share issue in relation to how many shares are held and can subscribe for a certain number of shares at a certain price. Those who do not already own shares can be given the opportunity to subscribe for shares if existing shareholders choose not to exercise their entire subscription right. The number of shares issued at the rights issue is decided at the Annual General Meeting that decided on the rights issue. New share issues can be made to a select few investors and depart from the preferential rights that existing shareholders normally have.

The effect of a new issue

The effect of more shares being issued is that the company's total market capitalization is divided into more shares. Each share becomes a smaller proportion of the company's total value. There can be several different types of shares and in cases where shares with voting rights are issued, each share after the new share issue becomes a smaller proportion of the company's votes. For large shareholders, it can be important to monitor their share of votes in the company as it provides an opportunity to influence the company by voting at the general meeting. For small savers, the right to vote is often less important. Having, for example, one per mille or half a per mille of the votes does not significantly change the possibility to influence by voting.

Calculate how the new share issue affects your calculation

It can have a big impact on your calculation of the investment to participate or not participate in a new share issue. To participate means that more money is invested and more shares are traded. How much money is invested in the individual company changes and then your risk and risk spread are affected. If you have rules for how much you can invest in a company, those rules can limit opportunities to participate in a new share issue. Risk and possible earnings at target price per share are likely to change. The average price of the shares you bought changes. The number of shares in the company changes and this is likely to affect both the assessed risk and the assessed target price. In the decision basis for participating or not participating, it can help to make a new calculation of risk and possible profit at the target price. In the new calculation, you use the assumptions that will be after the new share issue as the basis for the calculation. Roughly the calculation should be that the new market capitalization is the market capitalization before the new share issue plus the total contributed capital in the new share issue. The new market capitalization is divided by the total number of shares available after the rights issue. The new calculation can be compared with the calculation made before the first purchase of shares in the company.

Think about whether the deal is good for you

If it is still an attractive calculation with conditions after the new share issue and you believe that it is still a good deal, there are no obstacles to participating. Keep in mind that dilution for small savers is rarely a big problem. Companies that repeatedly turn to shareholders for more money in new issues will soon learn to get guarantors who, for a fee, promise to subscribe for the shares that are not subscribed for by existing shareholders. The company then receives the money even if not all existing shareholders participate in the rights issue. Think about whether dilution is a problem. Also think about whether it is a good deal or not to participate in the rights issue. It can be a great deal and it can also be devastating for your investment to participate in many new issues without thought. If from the beginning there was an attractive calculation of risk and possible profit at the target price, it is probably a fairly attractive calculation even after one or a couple of new issues where you do not participate and therefore receive some dilution. You can read more about calculating risk in relation to the possible target price in the risk management education.

Subscription rights have due dates

If you have been granted subscription rights, you have been given a security that has a due date. The subscription rights can be bought or sold on the stock exchange until a certain date when they become worthless.

Differences in value between ordinary shares and newly issued shares

There is a subscription price for the share that can be compared to the share price. It may be worthwhile to monitor how the price of the ordinary share relates to the subscription price for newly issued shares and subscription rights. There may be situations where it becomes a good deal to sell ordinary shares and instead buy subscription rights that are used to subscribe for shares in the new share issue. Conversely, the ordinary share may fall in price at the same time as the price of subscription rights is relatively high. Then it can be a good deal to sell their subscription rights and buy a little more ordinary shares.

Subscription rights may become cheaper towards the end

In the last days before the subscription rights become worthless, there may be many who want to sell their subscription rights with a fall in the price of subscription rights as a consequence. There may be situations where the subscription right costs almost nothing at the same time as it gives the subscription right to buy the share at a predetermined price. If the ordinary share is higher in price than it costs to buy subscription rights and subscribe for shares, you can make money by buying cheap subscription rights and subscribe for shares with the help of the subscription rights. The shares added to the new share issue are converted into ordinary shares some time after the new share issue has been completed.

Always act in a new share issue

It is important to do something. Subscription rights become worthless if they are not used and therefore you must either use the subscription rights to buy newly issued shares or sell the subscription rights before they become worthless.

What events can trigger price development?

No one can say with certainty which events will affect the share price. The price varies over time and it is difficult to know if an event leads to price movements. If the event is expected, the market may have already adapted to the event.

Information can affect the price

That the company publishes new information that shows how well they have made progress can affect the price. Information that describes new conditions for the company, failures or great progress can be of great importance for the share price. Expectations and outcomes of financial reports can be price-driving. If the outcome is in line with expectations, the price may not be affected, while a better or worse report than expected may affect the price. In addition to new information about the company in question, the price may be affected by new information from similar companies or new information that affects the environment in which the company operates.

The price is governed by supply and demand

The fact that many shareholders want to buy or sell the company's shares at the same time affects the price. If many want to buy at the same time as few want to sell, the price goes up and if many want to sell at the same time as few want to buy, the price goes down. The price is governed by supply and demand.

What triggers exist in the future?

No one can say with certainty which events will trigger price development, but it is possible to think about what a company has said they should do and compare with what they have already done.

Events that remain

It can be a good idea to think through what events are expected to occur. If all the expected good events seem to have occurred already without the share price rising, then the big rise may never come. How long it is reasonable to wait is individual and there are always more interesting companies.

The company is changing slowly compared to the quarterly economy

Listed companies publish quarterly financial reports that describe what the company's finances look like. A quarter is a short time of a company's development. Even if the company's share price changed during the quarter, the company's conditions for implementing its business concept may be the same as last quarter. For a long-term shareholder, it is important to think about why the share was bought from the beginning and whether the conditions for the company to succeed have changed or are the same as when the share was bought.

Patience and own analysis

It may take time before the price lifts. If the company follows its plan and communicates progress to its shareholders, the price of the company's share will probably follow the company's growth. Think before you invest. If you invest a smaller share of the capital, it will be easier to stay as a shareholder even if the price goes down temporarily. Patience is rewarded and seen over a longer period of time, the price will go up sometimes and down sometimes. We get to know the really big winners by finding companies that are early in their development, finding out a lot about the company and then having the patience to wait for more people to discover the company and make the same assessment of the company's future potential. Trust your own analysis.



Small companies in our introduction to the subject can be summarized as follows:

  • Small companies can be large. A market capitalization of SEK 100 billion can be a small company according to many small companies funds.
  • Investments made early in the company's development provide a chance for large increases in value as well as a risk of large decreases in value before it may turn around.
  • The company's financing in the early stages may be important later. Low indebtedness is good for future growth.
  • Decisions to participate or not to participate in a new issue are facilitated by calculating the risk with the number of shares and market value that remains after the issue is completed.
  • Although it is difficult to know which events trigger price development, it is good to think through which events have happened or are in the future.
  • Make your own analysis of the company and the company's conditions for success with its business concept. Be patient and trust your own analysis.

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